How Much Will the Tax Be When Cashing Out a 401k?

 

When you’re trying to make the very difficult decision to withdraw from your retirement savings the first thing you’re going to want to know is how much will the tax be when cashing out a 401k.

The tax percentage you will be charged is decided on an individual basis, but there are ways for you to figure this out.

You will be charged both state and federal taxes.

The federal percentage varies based on your income bracket. Keep in mind that the money you have put into a traditional retirement plan was before taxes were taken out, which means that money lowered your bracket. If you invested in your retirement plan last year and not this year, then that may raise your income and put you in a higher percentage bracket. Also, the money you are cashing out will count as income for this year, and may raise your bracket, as well. Despite all these variables, you can look at your tax paperwork from last year, which will say what percentage you fell into and estimate from there.

The state percentage applies to your whole state, and you can easily look up your particular states current percentage online, or, find it on your last years paperwork, assuming it hasn’t gone up this year.

If you have decided to withdraw it’s important to note a few things. First of all, on top of the taxes, you will also have to pay a ten percent early withdrawal penalty. You cannot withdraw funds at any time you want, there are only certain times you will be able to do this over your life. Also, twenty percent of the amount you withdraw will be held for taxes and the early withdrawal penalty, and it will be your responsibility to take care of the rest.

Obviously these early withdrawal costs really add up and make cashing out an undesirable thing to do.

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